Analysis: When Populations Bust, Not Boom

The economic impact of the dramatic reduction in birth rates in the recent past is causing significant concern. A short time ago The International Monetary Fund (IMF) published a discussion paper on the topic.

The paper, not an official policy document, was titled “The Fiscal Consequences of Shrinking Populations.” It started by noting how projections estimate that the percentage of people aged over 65 will rise from the current 12% to 38% by the year 2100.

Populations are already shrinking in several countries. By the end of the century, populations are forecast to be shrinking in nearly 70% of the more developed countries and in about 65% of the less developed countries.

More detail on aging is contained in the report “World Population Ageing 2015” published by the Department of Economic and Social Affairs of the United Nations.

Between 2015 and 2030, the number of older persons – those aged 60 years or over – in the world is projected to grow by 56%, from 901 million to more than 1.4 billion. By 2030, older persons will outnumber children aged 0-9 years (1.4 billion vs. 1.3 billion); by 2050, there will be more people aged 60 or over than adolescents and youth aged 10-24 years (2.1 billion vs. 2.0 billion).

The aging process is especially advanced in Europe and in Northern America, the report noted, where more than one in five people was aged 60 or over in 2015, but it is growing rapidly in the other regions as well.

By 2030, older persons are expected to account for more than 25% of the populations in Europe and Northern America, 20% in Oceania, 17% in Asia and in Latin America and the Caribbean, and 6% in Africa.

By 2050, nearly half of the world’s population will live in countries with at least 20% of the population aged 60 or over, and one in four people will live in countries where older persons account for more than 30% of the population.

Social transformation

“Population aging is poised to become one of the most significant social transformations of the 21st century,” the report emphasized.

The IMF paper went on to consider the financial consequences of such a massive demographic change. An idea of the impact is that it estimated there would be an increase of 8.5% of GDP on spending such as pensions and health care in more developed countries. This means that age-related spending would account for 25% of GDP.

The fiscal pressure created by such a change could lead to a large increase in public debt or severe cuts to other spending programs, the paper warned. Compounding the problem is the tendency of declining populations to reduce the rate of economic growth, which means it will be more difficult to reduce the debt to GDP ratio.

If this prospect were not already sufficiently dire the IMF went on to warn that its calculations were based on the medium variant of the population projections provided by the United Nations. Past experience has shown that such projections have had flaws with both fertility and mortality declining at a faster rate than predicted.

“The fiscal risks associated with this uncertainty are mammoth in the long term,” the authors of the paper stated.

Recommendations

When it comes to dealing with the problems highlighted by the IMF the paper had a number of recommendations.

First, there should be a reform of policy regarding entitlements. This needs to start now, but should proceed at a gradual pace so as to spread the burden over more than one generation.

For example, raising retirement ages over 2015–2100 by an additional five years beyond what is already legislated would reduce pension spending by about 2% of GDP by 2100.

Second, policy measures to boost fertility could help diminish the aging tendency. Nevertheless, the paper admitted that there has only been limited success with public policy to control birth rates. So far pro-natal policies seem to have only affected the timing of births, not the absolute number.

Another possibility is to increase immigration from countries with a younger demographic profile, although this is politically sensitive. The paper noted that to keep the old-age dependency ratio constant until 2100 there would need to be an eightfold increase in net migration. Even if such a level of migration did occur it would eventually deplete the working-age population in less developed economies.

Other possibilities include increasing the labor force participation of women and the elderly. For ages 25–49, female labor force participation rates are below those of men by about 10 percentage points in Europe and North America, and by 25–30 percentage points in Asia, Latin America, and Africa.

The paper estimated that cutting the gap between men and women by half over 2015–50 would reduce age-related spending by about 1% of GDP in 2050 and by 1.5% by 2100 in both the more and less developed economies.

Third, better tax systems and more efficient public expenditure is needed given the difficulty in offsetting the aging trend.

Going from boom to bust doesn’t only happen with financial markets, it is taking place right now with population.